Gr12 Eco - Market Structures - Oligopoly PDF

Market Structure Market Structure A market structure is an economic model of competition among businesses in the same industry. Market structure allows economists to examine competition among businesses in the same industry. Consequently, economists classify markets based on how competitive they a...

Market Structure Market Structure A market structure is an economic model of competition among businesses in the same industry. Market structure allows economists to examine competition among businesses in the same industry. Consequently, economists classify markets based on how competitive they are. Types of Market Structure Perfect Monopoly Competition Monopolistic Oligopoly Competition 04 Oligopoly Oligopoly Oligopoly is a market structure in which only a few sellers offer a similar product. It is less competitive than monopolistic competition. In an oligopoly, a few large firms have a large market share-percent of total sales in a market- and dominate the market. There are few firms in an oligopoly because of high start-up costs-the expenses that a new business must pay to enter a market and begin selling to consumers. An oligopoly has four major characteristics: 1. Few Sellers but Many Buyers. 2. Standardized or Differentiated Products. 3. More Control of Prices 4. Little Freedom to Enter or Exit Market Oligopoly Characteristics 1. Few Sellers but Many Buyers In an oligopoly, a few firms dominate an entire market. There is not a single supplier as in a monopoly, but there are fewer firms than in monopolistic competition. These few firms produce a large part of the total product in the market. Economists consider an industry to be an oligopoly if the four largest firms control at least 40 percent of the market. About half of the manufacturing industries in the United States are oligopolistic. The breakfast cereal industry in the United States is dominated by four large firms that control about 80 percent of the market. Your favorite cereal is probably made by one of the big four manufacturers. Although they offer many varieties of cereals, there is less competition than there would be if each variety were produced by a different, smaller manufacturer. Oligopoly Characteristics 2. Standardized or Differentiated Products Depending on the market, an oligopolist may sell either standardized or differentiated products. Many industrial products are standardized, and a few large firms control these markets. Examples include the markets for steel, aluminum, and flat glass. When products are standardized, firms may try to differentiate themselves based on brand name, service, or location. Breakfast cereals, soft drinks, and many other consumer goods are examples of differentiated products sold by oligopolies. Oligopolists market differentiated products using marketing strategies similar to those used in monopolistic competition. Oligopoly Characteristics 3. More Control of Prices Because there are few sellers in an oligopoly, each one has more control over product price than in a monopolistically competitive market. For example, each breakfast cereal manufacturer has a large enough share of the market that decisions it makes about supply and price affect the market as a whole. Because of this, a seller in an oligopoly is not as independent as a seller in monopolistic competition. A decision made by one seller may cause the other sellers to respond in some way. For example, if one of the leading breakfast cereal manufacturers lowers its prices, the other manufacturers will probably also lower prices rather than lose customers to the competition. But if one manufacturer decides to raise prices, the others may not follow suit, in order to take customers and gain market share. Oligopoly Characteristics 4. Little Freedom to Enter or Exit Market Start-up costs for a new company in an oligopolistic market can be extremely high. Entering the breakfast cereal industry on a small scale is not very expensive-but the profits are low too. Therefore, competing against the major manufacturers require large amounts of funds. In addition, existing manufacturers may hold patents that act as further barriers to entry. Firms in an oligopoly have established brands and plentiful resources that make it difficult for new firms to enter the market successfully. For example, breakfast cereal manufacturers have agreements with grocery stores that guarantee them the best shelf space Oligopoly Characteristics 4. Little Freedom to Enter or Exit Market However, all of the investments by firms in an oligopoly make it difficult for them to exit the market. When a major breakfast cereal manufacturer begins losing money, its operations are too vast and complex to sell and reinvest easily. Thank You!